Is Paying Down that Debt Your Best Option?

two generations discussing finances in their living room

Having debt can be stressful, but there are ways consumers can manage the amounts they owe. The most important thing is to determine the best way to pay off debt for your unique situation.

Most of the time that means making regular, on-time installments and dedicating more than the minimum payment each month to the bill. In some rare instances, though, quickly paying off debt may not be your best option.

The typical Oregonian has some form of debt, and the debt-to-income ratio for the state overall is 1.89; the seventh-highest in the country.

Consider these statistics:

Here are a few situations that may warrant smaller debt payments:

When you’re getting a tax break

Some debts earn you a tax cut due to the interest you pay on them. Student loans and mortgages are prime examples of this. Before paying off your debt, calculate how much money you’ll save at tax time because of these debts. If it’s more than the amount you’ll pay in interest, it may be worthwhile to direct your overpayments elsewhere or build up your savings account.

When the debt is your oldest line of credit

Your credit score is one of the most important figures in your financial life. Higher scores could grant you lower interest rate opportunities and access to a wider variety of credit products. Lower scores may prevent you from taking out loans when you need them and stick you with high interest rates when you do get one.

Luckily, the average Oregonian has a healthy credit score. The average for the state is 686, and in Portland, it’s 698. However, it helps to be aware of how your financial decisions could affect your scores. While paying off debt is generally good for credit scores, closing out your oldest account may have a negative impact. If you go to a zero balance, and that line of credit is closed or goes off of your report entirely, there could be an adverse impact on your credit score.

One key component to determining your credit score is the age of your oldest account. The longer you’ve been managing debts, the more confident future lenders may be about your ability to handle financial responsibilities.

If you still have your very first credit card, or your student loans were your introduction to credit, think twice about closing them out. Doing so could make it appear as though you have less experience managing credit.

Of course, you will be faced with your final student loan payment sooner or later. If it is your oldest line of credit, you’ll most likely see a dip in your score. Don’t worry, by practicing good credit habits, like making payments on time and keeping your credit utilization rate below 30 percent, you should be in good shape.

When you’re still building your savings

When you receive cash, whether it’s your regular paycheck or a surprise windfall, you have options for how to use it.  Before you decide to allocate a large amount of money to debt payments, consider all your options. If you pay off your debt, how will it impact your monthly budget or emergency savings account?

It’s true that paying off your debt should be one of your top priorities, but building up savings to help you out in an emergency should also rank highly. If your car suddenly breaks down, it won’t matter that you’ve paid off your student loan debt, but it will matter if you don’t have the funds to repair or replace your vehicle.

You could apply the same mindset to the rest of your financial responsibilities. When you receive your paycheck, you could dedicate 100 percent of it to your credit card bill, but then how would you pay for utilities or groceries? Those expenses may wind up back on your credit card, negating much of the impact of your payoff.

When you could responsibly invest instead

Once you have room in your budget to begin investing*, this can be a smart way to grow your wealth. Having enough room in your budget to invest doesn’t necessarily mean being completely debt-free.

If you have a sound debt repayment plan that still gives you leeway to invest, doing so may be a smarter move than allocating all your money toward your principal. Choosing to pay invest over paying down debt is most applicable to low-interest debts because you may be able to make more money by investing than you’d save by paying off your debt. Speaking with a financial advisor can help you determine the best approach for you and your debt payments and investment strategy.

father holding his child in their living room

Carefully plan out debt repayment

You may be anxious to rid your credit history of certain debt, but it’s important to go about repayment strategically, which means considering all your options and the potential consequences of paying off a debt completely. If you recently received a windfall, or if you’re thinking you would like to save your extra coin, start by comparing OnPoint’s various savings options. Not sure if saving, paying off debt, or investing is right for you? Reach out to one of our experienced Financial Advisors.

Disclosures

*Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC and are not insured by credit union insurance, the NCUA or any other government agency, are not deposits or obligations of the credit union, are not guaranteed by the credit union, and are subject to risks, including the possible loss of principal. OnPoint Community Credit Union and OnPoint Wealth Management & Investment Services® are not registered broker/dealers and are independent of Raymond James Financial Services, Inc. Raymond James privacy policy. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

Any opinions are those of the author and not necessarily of RJFS or Raymond James.

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